O.C. Recovery Plan Rose From a Death Struggle

SANTA ANA — Before Orange County could give birth to a bankruptcy recovery plan last week, it had to pass through the five stages of death.

First, denial that the county was truly broke. Then, anger over who was to blame. Back-room bargaining broke out next over who should bear the burden. Depression set in as the fiscal realities became clear.

Now, with the recovery plan in the hands of Sacramento lawmakers, comes the final stage: grudging acceptance among most Orange County leaders of their fate and what needs to be done to solve the worst municipal bankruptcy in U.S. history.

"It was like dying without the death," said Chris Varelas, the county's financial adviser. "We had to go through all the phases to get to this point."

And the county, still struggling to recover, barely pulled out an acceptable plan.

Gov. Pete Wilson had given Orange County until Aug. 21 to come up with a plan, and county officials scheduled a 2 p.m. meeting that day to unveil the details. Yet the days and hours leading up to that presentation were marked by harried negotiating that continued virtually around the clock.

Deals came together and fell apart so quickly during the frenzied pace that no one could keep count. Along the way, officials from the county, cities, schools and special districts played a high-stakes game of power politics, seeking to protect their fiefdoms and their claims to taxpayer money.

Despite much bickering, the self-interested parties ultimately realized that if they couldn't come up with a home-grown solution, an even harsher fate awaited.

Cities and special districts faced a crippling loss of millions of dollars in property tax revenue to help pay off the county's financial losses. The county's wealthy transportation agency also was exposed to a raid of more than $1 billion in sales tax receipts to fund the county's recovery.

The most ominous threat, however, was the threat of a state-appointed trustee who would usurp the Board of Supervisors' power and take control of the county's destiny. Such a trustee would be charged with preventing bond default and would have little regard for protecting local governments.

"The threats were making everyone feel vulnerable," Supervisor William G. Steiner said. "The concessions made all around were driven by the fear of the unknown, the fear that things could get much, much worse."

The county declared bankruptcy Dec. 6 after a risky financial strategy led to the loss of nearly $1.7 billion, most of it belonging to the county, cities, schools and other government entities. In the aftermath of the bankruptcy filing, the nearly 200 agencies that had lost money in the Orange County Investment Pool demanded a 100% pay-back. Financial and legal advisers looked for ways to cut costs, sell assets and privatize services, but it became clear those efforts could barely begin to cover the loss.

The county tried to raise the sales tax by a half-cent in June as a solution, but voters rejected it. When it appeared that no progress was being made and warring parties were at a stalemate, the Orange County Business Council volunteered to enter the fray at the end of July to help navigate a solution.

Three weeks later it appeared that a framework for a solution was in hand after a daylong meeting Aug. 17 at the Marriott in Newport Beach.

"It looks like this has legs," an exhausted county bankruptcy attorney Bruce Bennett declared to the assembled parties that included Business Council members and advisers and representatives of the pool investors.

Hours later, the euphoria faded, with the plan unraveling as new issues arose. The next three days were spent trying to resuscitate the proposal. Nearly everyone involved was connected by telephone, cellular phone or pager.

An attorney on vacation in Hawaii spent more than $100 receiving faxes at his hotel to keep tabs on negotiations, while a powerful county developer trying to relax on a houseboat in Arizona kept a cellular phone by his side.

Board of Supervisors Chairman Gaddi H. Vasquez said he spent the weekend lobbying.

"I was forceful, I was as urgent as I could be and I made it very clear we were at critical milestone in this process," Vasquez recalled. "I said, 'Come on folks, we're in the ninth inning. We need to knock off the territorial protectionism.' "

But on the eve of Wilson's deadline, there seemed to be little hope.

"I was stunned," Steiner said, recalling a phone call that came late in the night of Aug. 20 informing him that the plan was falling apart. "I didn't know what to say."

Supervisor Marian Bergeson received a similar phone call. But the former state senator, unfazed after years of seeing the Legislature pass budgets at 3 a.m., was more optimistic. "I said, 'Lets all get a good night's sleep,' " she recalled.

By 7 a.m. Aug. 21, the sides began arriving at the Irvine Civic Center for a last-ditch effort.